How to Set Up an S Corp

Here is the entire decision in one number. Your projected savings are the payroll tax you stop paying on distributions, minus the real annual cost of running the S corp. If that number is not comfortably positive, stop here.

The pitch you see elsewhere is “save 15.3% on everything above your salary.” Reality: the savings on distributions is 15.3% only up to the Social Security wage base, $184,500 for 2026. Above it, you were only paying the Medicare portion anyway, 2.9%, plus an extra 0.9% Additional Medicare Tax on wages or self-employment income above $200,000 single or $250,000 married filing jointly, thresholds that are not indexed for inflation. QBI interaction also trims the net benefit because wages are not QBI, only the pass-through profit is.

Run your own numbers before reading another word of this guide: run your own numbers in 60 seconds with the S Corp Savings Calculator. Results vary by state, income, and how the payroll and reasonable salary numbers shake out; treat any calculator output as a starting estimate, not a guarantee.

Meet a hypothetical composite consultant. This is illustrative only, a composite scenario built from round numbers, not a real client, and results vary with your state, income, and actual reasonable salary. Two versions of the same person, two profit levels, one flips the answer.

Case A, $60,000 profit: a reasonable salary of roughly $45,000 for the work performed leaves about $15,000 of distributions. Payroll tax avoided on that $15,000 is roughly 15.3% x $15,000, about $2,300, before the self-employment-tax deduction adjustment and QBI drag. Annual carrying cost runs $1,500 to $3,000. Net: somewhere between slightly positive and negative. At $60,000 this is a coin flip at best. We would usually tell this consultant to wait.

Case B, $160,000 profit: a reasonable salary of roughly $90,000 leaves distributions of about $70,000, all comfortably under the wage base, so the avoided tax is roughly 15.3% x $70,000, about $10,700 gross. Subtract QBI drag and carrying costs and the net still lands around $6,000 to $8,000 a year. At $160,000 the answer changes. Same person, same business, different number.

Profit level is not a detail of the S corp decision. It IS the decision. The entity does not save money; the gap between profit and reasonable salary does.

An S corp is a tax election, not an entity. You cannot “form an S corp” at the Secretary of State. You form an LLC and teach the IRS to tax it like one. Most owners use an LLC; a handful use a traditional corporation.

State filing fees range roughly $50 to $500 depending on the state. If you use a registered agent, budget roughly $100 to $300 per year.

Some states layer their own costs and elections on top of the federal picture. The biggest example is California, which has its own S corp rules and an $800 minimum franchise tax. See setting up an S corp in California for the state-specific mechanics; this page covers the generic steps.

Choosing between an LLC and a corporation as your base entity is its own decision. We do not re-teach it here; read our full LLC vs S corp: which base entity breakdown, or if you are still deciding between the S corp and C corp tax treatment entirely, see S corp vs C corp.

Getting an Employer Identification Number is free, done online at IRS.gov, and takes minutes. You need it before you can file Form 2553 or set up payroll, so do this immediately after your entity is approved.

Be careful here: several third-party sites charge a fee to “help” you get an EIN. The IRS issues them for free directly on its own site. There is no reason to pay anyone for this step.

This is the step the “form 2553 deadline” keyword is really asking about. The election is due no later than 2 months and 15 days after the beginning of the tax year the election is to take effect, or any time during the preceding tax year. For a calendar-year business that is already operating, that means March 15 for a current-year election. A brand-new entity's clock starts at formation, not January 1.

All shareholders must consent and sign the election. Spouses in community property states may need to sign too. Once accepted, the IRS mails a confirmation letter (Notice CP261). Keep it forever, and do not file your first 1120-S assuming an acceptance you cannot prove.

This is the identity shift that trips people up: the owner becomes an employee of their own company. A payroll service handles withholding, quarterly Form 941, annual W-2/W-3 filings, and state unemployment registration.

A payroll service for a solo owner typically runs $500 to $1,200 per year. Monthly or quarterly payroll is fine; what matters is that a reasonable annual salary lands on the W-2 by December 31.

One more wrinkle to plan for: becoming an S corp does not make your clients stop sending 1099s automatically. See does an S corp get a 1099 for what to do when one shows up.

Salary must reflect what you would pay someone else to do your job. Setting it too low is the classic S corp audit trigger. The factors that matter: your role, your hours, market rates for comparable work, and what the business actually generates in revenue.

We do not re-teach the full methodology here; read our full reasonable salary guide, including how we document it.

Every dollar of salary you shave off to boost savings is a dollar of audit risk you are buying. There is a defensible number for your role; the game is documenting it, not minimizing it.

A sole proprietorship is a tax status. An S corp is a system. If you will not run the system, payroll, minutes, clean books, deadlines, the election costs more than it saves.

Quarterly estimated taxes on your distribution income are their own deadline set, separate from payroll; see quarterly estimated taxes for the full schedule and safe-harbor rules.

Plan on roughly $500 to $1,000 up front and $1,500 to $3,000 every year after that, depending on your state and how much you outsource.

The honest framing: DIY means nobody checks your election deadline or your salary number. An online formation service files the forms but exercises no tax judgment. CPA-guided costs more, but includes the gate math from Section 1 and the reasonable salary documentation from Step 5, the two things that actually determine whether the election was worth doing.

Still not sure this pencils out for your income? Go back and run your numbers with the S Corp Savings Calculator before you spend a dollar on formation. Results vary by state, income, and salary.

Skip the election, at least for now, if any of these describe you:

• Net profit is under roughly $50,000 to $80,000, a reasonable salary eats most of it and leaves too little distribution to matter.
• You already have W-2 income over the Social Security wage base ($184,500 for 2026) from another job. That changes the math on how much of your business income the S corp actually shelters.
• States that tax S corps heavily on top of the federal picture.
• Short-runway side gigs you do not expect to run for more than a year or two.
• You will not run payroll or keep separate books. The election does not run itself.

You do NOT need this page if your net profit is under roughly $50,000: stay a sole proprietor, take the QBI deduction, and revisit when profit grows.